Market Summary For February 2012

Equity markets continued to rally into February and almost all returned positive returns in the month except for Indonesia which recorded a loss of 0.6% in February. The Asia ex-Japan and the emerging markets regions posted strong gains again during the month with the MSCI Asia Ex-Japan and the MSCI Emerging Markets Indices both rising 4.2%. Especially strong performances were seen in the Taiwanese and Russian equities markets with returns of 7.1% and 8.2% respectively for the month. The China equity market fared well too, with a return of 4.4% during the month. In the developed markets front, the US and Europe posted gains of 2.4% and 4.5% respectively, while Japan posted gain of 2.4%. At the same time the MSCI AC World Index ended February 3.1% higher than the previous month. Reversing from the loss of -0.6% in January, Malaysia’s equity market posted a gain of 3.2% in the month.

Greece Deal Done, What Now?

During the month, Greece has successfully secured its second bailout funds worth EUR130 billion which allows them to meet bond payments of EUR14.4 billion that mature on 20 March 2012, hence avoiding default. in return, Greece has to reduce its debt-to-GDP ratio from the current level of 160% to 120.5% in 2020. However, massive austerity measures in place by the government to cut expenditure may lead to contracting Greek economy. Greece may miss the debt reduction targets and may require another bailout in the near future.

Another part of the bailout deal is that private sector investors have to suffer a hefty haircut of 53.5% on existing Greek government bonds. However, private investors have the chance to vote whether to accept the deal and Greece would need an agreement rate of more than 75%. If it is lower, Greece may be forced into disorderly default and could lead the Eurozone back into crisis mode again. The equity market will most likely be impacted if the deal ends up negatively.

No Sign of QE3 by Fed But ECB Rolled Out LTRO2

In the semi-annual speech to Congress, the Federal Reserve (Fed) Chairman, Ben Bernanke expressed that the US’s labor market is improving but the fundamentals are still weak which pose a risk to economic growth. He also mentioned that the still-weak housing market is the cause of the slow recovery from the recession, and it is also reducing the effect of low interest rates on the economy. The Fed Chairman did not indicate any further quantitative easing (QE3) which was widely anticipated by the market. This is a good sign as it indicates that the Fed is confident that the economy growth is still intact and does not need another round of easing.

On the other hand, the European Central Bank (ECB) rolled out another round of Long-term Refinancing Operation (LTRO2). 800 European banks participated in the 3-year loans programme and took up EUR529.5 billion from the ECB which is more than the EUR489 billion borrowed during LTRO1 in December last year. The news was received favourably by bond market investors as Italian and Spanish long-term yields declined. While the programme by ECB has successfully solved the short-term liquidity risk in the European banking system, the outcome over the long-term when the 3-year loans mature still remain a concern to the market.

High Oil Prices Back To Haunt Once Again

The Iran nuclear power confrontation with the West has caused oil prices to rise again. The sanctions by the West on the world’s fifth largest oil exporter and the second biggest producer in the Organisation of Petroleum Exporting Countries (OPEC) cartel has caused concerns on a significant reduction in oil supply. Due to this the price of the WTI Crude Oil Future and the Brent Crude Oil Future jumped tremendously by 8.3% and 10.9% to USD107.07 and USD 123.16 per barrel respectively. The market is concerned that the high oil prices may further dampen the already weak global economic growth. Furthermore, it may also increase the inflationary pressure of the developing countries and give lesser room for policymakers to alter their benchmark interest rates to promote economic growth.

FSM Portfolios Review For February 2012

No-Loss Making Funds For Another Month

Similar to January, all the funds in our five portfolios were positive for the month of February. In the bond segment, AmBond and AmDynamic Bond continue to deliver stable returns of 0.42% and 1.05% respectively in the month.  Moreover, the Alliance Asian Bond Fund and AmEmerging Markets Bond unit trusts returned 0.69% and 1.45% respectively.

In terms of equities, Greater China, BRIC and Asian unit trusts performed well in February. OSK-UOB Big Cap China Enterprise Fund, which was the best performing fund in our portfolios, returned a positive gain of 5.09% in the month. AmBRIC Equity Fund, Eastspring Investments Asia Pacific Equity MY Fund and AmGLobal Emerging Markets Opportunities delivered returns of 4.45%, 4.01% and 3.68% respectively. OSK-UOB Asian Growth Opportunities Fund, the worst performing equity fund in February delivered a return of 2.68% in the month.

Maintain Preference On Equities Over Bonds

Given the good performance in the equity market for the past two months, we still maintain our “overweight” recommendation on equities rather than bonds. This is because valuations still remain at an attractive levels. On the other hand, global fixed income securities are currently at historical-low yields. Also, coupled with strong corporate earnings growth, we expect higher potential return from equities as compared to fixed income securities in 2012. As such, our current portfolios are “overweight” on equity (refer to Table 2).

Latest Portfolio Factsheets

The portfolios' factsheets are updated on a monthly basis and links for the most up-to-date factsheets are as provided below:

1. Conservative
2. Moderately Conservative
3. Balanced
4. Moderately Aggresive
5. Aggresive

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